The Second-Stage in an Instrumental Variable Approach to Control for Measurement

question 24

Multiple Choice

The second-stage in an instrumental variable approach to control for measurement error in an independent variable is

• A)estimating the original population regression model with the predicted values of the mis-measured variable substituted for the observed values of the endogenous variable.
• B)regressing the mis-measured variable on only the exogenous variables in the original regression equation and using those estimates to calculate predicted values of the mis-measured variable.
• C)regressing the mis-measured variable on only the alternative value of the mis-measured variable.
• D)regressing the mis-measured variable on both the alternative measure of the mis-measured variable and all of the remaining exogenous variables and using those estimates to calculate predicted values of the mis-measured variable.

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Definitions:

Invisible Hand

A metaphor introduced by Adam Smith to describe the unintended social benefits of individual self-interest actions.

Free Market

An economic system in which prices for goods and services are determined by the open market and consumers, where the laws and forces of supply and demand are free from any intervention by a government, price-setting monopoly, or other authority.

Free Trade Advocates

Individuals or groups who support the removal of trade barriers between countries to facilitate the exchange of goods and services.

Adam Smith

An 18th-century Scottish economist and philosopher, best known for his book "The Wealth of Nations," which laid the foundations for classical economics and modern capitalism.